Last week Southwestern Energy and Kinder Morgan announced a partnership to provide responsibly sourced gas to the Northeast markets that Kinder Morgan serves with its Tennessee Gas Pipeline.
Why does it matter?
As companies seek to reduce the methane intensity of their operations, being compensated for those efforts will likely turn on the commercial viability of responsibly sourced gas.
What’s our view?
Right now there appears to be a limited market for such gas, as we are unable to identify a utility commission that has agreed to allow a gas utility to charge a higher price for such gas, but that could change. For now, however, the companies leading this effort are not likely to reap much economic benefit in the near term.
Last week Southwestern Energy (SWN) and Kinder Morgan (KMI) announced a partnership to provide responsibly sourced gas (RSG) to the Northeast markets that KMI serves with its Tennessee Gas Pipeline. As companies seek to reduce the methane intensity of their operations, being compensated for those efforts will likely turn on the commercial viability of RSG.
As we discuss today, there appears to be a very limited market for such gas and almost no market in the Northeastern United States, the market on which the announced partnership is focused. However, there are actions being taken around the world and here in the U.S. that could increase the value of RSG. But, for now, the companies leading this effort are not likely to reap much economic benefit in the near term.
Defining Responsibly Sourced Gas
InGreen Premium for Lower Carbon Natural Gas, we discussed that one of the difficulties in being compensated for the actions taken to lower the methane intensity of the gas you are producing and transporting is both measuring your own intensity and establishing the standard against which to measure that intensity. SWN and KMI address both of these issues in their announcement. They assert that their RSG will go through a rigorous verification process to certify that it meets or exceeds the standards established by the ONE Future coalition, a group of 50 natural gas companies working to voluntarily reduce methane emissions across the natural gas value chain to 1% (or less) by 2025. That simple statement addresses both concerns. First, it claims that the parties will be “rigorously” verifying their own intensity and then identifies the standard against which to measure the methane intensity of their product.
Southwestern Energy has agreed to use a company that was mentioned in our prior article, Project Canary, to continuously monitor emissions at SWN production sites in the Appalachian Basin. KMI does not specify how it will demonstrate the methane intensity of its pipeline operations. However, both companies assert that their current operations are substantially below the methane intensity rate established by the ONE Future coalition of 0.28% or lower for production, compression and gathering and the 0.31% transmission target.
Market Value of Meeting Such Goals
Even assuming that SWN and KMI can meet those goals, there does not appear to be a robust market right now for RSG in the Northeast U.S. as we have been unable to find any utility commissions that have agreed to allow their gas utilities to charge a higher price for such gas. This likely means that the market is probably limited to retail choice providers or commercial / industrial customers who, for their own reasons, want to demonstrate a lower carbon intensity. However, there are actions being considered both here in the U.S. and worldwide that could increase the market for RSG. We will look at those next.
While it is far from certain that the reconciliation bill being considered in Congress will ever be enacted or enacted in the form in which it currently exists, there is a tax provision in that bill, which is being vigorously opposed by the Interstate Natural Gas Association of America, that could actually benefit producers like SWN and pipelines like KMI if it were enacted. The tax is designed to penalize parties that participate in the natural gas supply chain if they have a methane intensity above a certain level. It is hard to compare the proposed tax to the intensity goals identified in the SWN/KMI announcement, but essentially the tax would start at $1,500 per ton of methane from each facility currently required to report its methane emissions to the EPA, if those emissions exceed a certain intensity level.
For production facilities like those owned by SWN, the tax would only apply to facilities with a methane intensity higher than 0.20%. For compressor stations and pipelines like those owned by KMI, the tax would only apply to those with an intensity factor greater than 0.11%. For the rest of the supply chain, the tax would apply to any facility that has an intensity factor higher than 0.05%. However, the production in the Marcellus basin where SWN operates is considered one of the lowest methane intensity basins in the country, which could mean that they will see a competitive advantage if this tax is passed.
Lower Carbon LNG
InLower Carbon LNG – Will Others in the Supply Chain Help Achieve That Goal?, we discussed the recent increase in interest for lower carbon LNG. We see this as perhaps the most viable market for RSG as overseas buyers of LNG seek to reduce the carbon footprint of the LNG they use. However, the portion of the overall carbon footprint from a single cargo of LNG that arises from the production and transport of that gas is fairly small when compared to the total amount of carbon produced.
As seen above, the percentage of overall carbon emissions from the production through the transport to the LNG terminal is in the range of 20 to 25% of overall emissions. A recent study by the Columbia University Center for Energy Policy looked at recently announced carbon-neutral LNG cargoes where the entire carbon emissions were offset through carbon reduction credits. That study found that at a price of $7 per ton of CO2e, the offsets cost about $0.55/MMBtu. Assuming that RSG could eliminate all of the emissions from production through the transmission to the terminal, that would make the maximum premium for RSG only about $0.1375/MMBtu.
Thus, for now, the premium for RSG would not appear to be substantial, nor would the overall market. However, those companies that are positioning themselves now may be able to take advantage as the market develops and may see other benefits from reducing the carbon footprint of their operations, especially when the goal is reducing methane intensity, which would mean they capture or keep more of the methane and have it to sell.
If you would like to discuss RSG in more detail, please contact us.